Opportunity: Emerging markets
The new emerging markets epoch
Macro fundamentals in emerging markets have been transformed in the past two decades with leading global companies to choose from, and rapidly developing sectoral and regional themes reshaping the global investment landscape.
Why emerging markets?
Companies in leading emerging markets are becoming regional and global leaders in key industries undergoing rapid technological change, including semiconductors, batteries, renewable energy and fintech.
In pure economic terms, emerging markets are well placed to take the lead in the next global equity upcycle. Low core inflation, an advantageous demographic structure underpinning steady growth in consumption and wealth accumulation, growing foreign exchange reserves, and trade surpluses. Prudent fiscal policies characterize our favored emerging economies in Central Europe, Latin America and Asia, and these positive attributes are reflected in borrowing costs and volatility that have converged with developed markets.
We believe this set-up is unique in the turbulent history of emerging markets investing and represents an opportunity to rebalance your portfolio as the Earth’s economic axis tilts once more.
Jaap van der Hart
Companies in leading emerging markets are starting to surface as global leaders
Investors remain underweight many of the world’s most innovative economies and as a result they are missing direct exposure to some of the best growth companies for long-term investors.
From a macroeconomic perspective, the advantages developed markets have enjoyed in the past decade have evaporated with the fight against inflation. Quantitative easing has stopped or is disappearing, real rates are normalizing, and emerging market fundamentals are superior.
Volatility, which has traditionally been a weakness of emerging markets, is now the same as developed markets while valuation metrics show emerging markets trading at a historic discount.
The left-hand chart shows the valuation spread of the MSCI World Index vs. the MSCI Emerging Market Index. The valuation spread is based on four bottom-up-calculated multiples (price-to-book, price-to-earnings, price-to-cashflow, and price-to-dividend). For each multiple the valuation ratio of the MSCI Emerging Markets Index is divided by the same valuation ratio for the MSCI World Index. The right-hand chart shows the five-year rolling standard deviation in MSCI Emerging Market Index and the MSCI World Index. Source: Robeco, MSCI, August 2023.
Robeco’s emerging markets team has unrivaled experience with stable investment teams since the foundation of fundamental emerging market investing in 1994 and quantitative emerging market investing in 2006. This consistency and long track record also mean we leverage a rich source of country, sector and stock data. Bolstered with renowned sustainability and next generation quant expertise, Robeco can find the best opportunities in the vast emerging market investment universe.
Our multi-decade track record in emerging markets investing has been built on the foundations of proprietary, award-winning research. We find an edge at region, country or sector level, and rely on our research analysts and sustainability experts to find the best opportunities.
Emerging markets are the most fertile pastures for value hunters and we manage our strategies with a value tilt. Turnaround plays and companies with embedded competitive advantage that isn’t yet priced-in by domestic or international investors can be found with rigorous research and local knowledge.
Quantitative solutions exploit deeply entrenched cognitive biases that afflict investors. Our disciplined, transparent and systematic approach keeps emotions at bay and takes advantage of market inefficiencies driven by human behavior. This is how we deliver superior risk-adjusted performance for our clients in the long run. In addition, our quant strategies allow for extensive customization along various risk, return and sustainability dimensions.
Robeco has long been a leader in SI, taking sustainability into consideration since 2001 and integrating ESG factors since 2011. Assessing existing and potential ESG risks and opportunities helps us make better-informed investment decisions.